Changes have been made to the Absentee Owner Surcharge (AOS) exemption and the calculation of AOS for trusts that are part of a chain of trusts. Trusts with foreign beneficiaries should consider the new rules.
The relevant legislation, the State Taxation Acts Further Amendment Act 2017 Vic (Act) received Royal Assent on 19 December 2017.
Absentee Owner Surcharge
From 1 January 2016, the AOS applies to taxable land owned by foreign owners. The AOS covers discretionary, unit and fixed trusts with at least one beneficiary who is a Foreign Beneficiary (Absentee Trust). As of 2017, the AOS has been increased to 1.5%.
A Foreign Beneficiary, or Absentee Beneficiary as referred to in the Act includes:
- Foreign individuals (excluding Australian permanent residents) absent from Australia on 31 December of the year prior to the tax year or absent for more than 6 months in the year prior to the tax year; or
- A corporation incorporated outside of Australia or a corporation where an Absentee Person/Persons hold more than 50% shares or voting power, or can control the composition of the board.
Before 2018, a discretionary AOS exemption (Exemption) was only available for corporations. The Victorian Government has extended the Exemption to include Foreign Beneficiaries of an Absentee Trust. The discretionary Exemption status may be granted to a Foreign Beneficiary of the trust such that the beneficiary is not considered to be an Absentee Person. As a result, a trust where all Foreign Beneficiaries are exempt will not be considered to be an Absentee Trust to be liable for the AOS (Trust Exemption). Exemptions for Foreign Beneficiaries can apply from 1 January 2018.
Criteria for Exemption
The guidelines for the Exemption criteria have been published by the Treasurer in the Government Gazette on 5 January 2018. Broadly, the Exemption is intended to relieve trusts that are Australian-based, exhibit good corporate behaviour (including tax liability records), operate commercially in Victoria and whose commercial activities contribute to the Victorian economy by utilising local inputs (labour, material and services). The Exemption is not intended to apply to passive property investors.
The Treasurer will also have regard to the nature and degree of a Foreign Beneficiary’s interest in the trust and practical influence of the beneficiary on the administration and conduct of the trust. For example, the greater the degree of interest/ practical influence and involvement in the trust by the Foreign Beneficiary, the less likely an Exemption will be granted.
The Trust Exemption criteria mirrors the corporation Exemption criteria to provide a level playing field for Australian-based corporations and trusts that make significant contributions to Victoria’s economy.
Trustees should make a written application, addressing the criteria outlined by the Treasurer’s guidelines (i.e. the extent of use of Victorian labour, materials, FIRB approvals, a statement on how its activities contribute to the Victorian economy, details of ownership structure and entitlements etc.). A list of details to include in the application can be found on the Victorian State Revenue Office website.
Changes to Absentee AOS for land held through a Trust Chain
From the 2018 land tax year, the way AOS is calculated for land held under an Absentee Trust will change. This change applies exclusively to land held by a trust in a chain of trusts (i.e. head trust/sub-trust structure). Prior to the modification, on one view the AOS was calculated based on the interest a foreign-owned head trust (a trust not held by further trusts) held in the sub-trust which owned the land.
For example, if A Trust is 100% held by B Trust, and B Trust is 30% held by C (a Foreign Beneficiary), A Trust will be assessed on 100% of the taxable land value even where there’s only a nominal foreign holding in B Trust.
From the 2018 land tax year, where the taxable land is held by a sub-trust, it will be clear that the AOS will be calculated on the proportion of interest (does not include an interest they hold on trust for another person) a Foreign Beneficiary owns directly/indirectly in the land held by the trust.
Applying the same facts above, C would have 100% x 30% = 30% interest in the land held by A Trust. The AOS for A Trust will now be assessed on 30% of the taxable land value.
Where the taxable land is held by the head trust, the AOS is calculated on the interest of the Absentee Beneficiary in the land.
On the same facts and assuming B Trust holds taxable land, C has a 30% interest in B Trust. The surcharge for B trust will be assessed on 30% of the taxable land value.
Thank you to Greenwoods Summer Clerk Eugenia Jin for her assistance in preparing this Riposte.